Risks for Bitcoin Futures ETFs

We have written recently about spot Bitcoin ETFs. The odds seem to be getting better that this way of holding and trading Bitcoin may become a reality. This is good news for the several companies that want to provide ETFs that track the spot price of Bitcoin. It may not be such a great deal for companies that currently provide ETFs which track Bitcoin futures. One of the basic risks for Bitcoin futures ETFs is that spot Bitcoin ETFs simply make more sense than tracking futures.  Another is that spot ETFs will be cheaper to operate.

Bitcoin Futures ETFs

Here are six ETFs that track Bitcoin futures with the biggest having $1.1 billion in assets and the smallest having $13 million.

  • ProShares Bitcoin Strategy ETF
  • ProShares Short Bitcoin ETF
  • VanEck Bitcoin Strategy ETF
  • Valkyrie Bitcoin Strategy ETF
  • Simplify Bitcoin Strategy PLUS Inc
  • Global X Blockchain & Bitcoin Strategy ETF

Because currently there are no ETFs that track the spot price of Bitcoin these ETFs are the best choices for tracking Bitcoin without having to own Bitcoin. The correlation between futures and the spot price of Bitcoin is about 99%. Thus, a trader can use this approach to benefit from a rising Bitcoin price without having to deal with blockchains, wallets, or keys. Nevertheless, these are workarounds instead of a direct link to the price of Bitcoin. That is what people will have when spot Bitcoin ETFs are approved.

Will We See a Stampede Out of Futures ETFs and Into Spot Bitcoin ETFs?

A concern voiced by Bloomberg is that spot Bitcoin ETFs threaten futures ETFs. Their estimate is that a spot Bitcoin ETF market would come to about $100 billion which dwarfs the futures ETF market. Spot prices are easier to understand for mom and pop investors and traders. And why invest in something that is almost the price of Bitcoin when you can actually invest in something that tracks Bitcoin’s price directly.

The other issue will be the cost of buying shares of a spot Bitcoin ETF versus the current price for a futures ETF. One of the major players in the spot Bitcoin ETF world if they all get approval will be Blackrock. Blackrock currently has 412 ETFs and $2.5 billion under management. They compete by cutting their fees to the point of driving customers away from their competition.

Thus we expect to see a tendency for new investors who want a taste of Bitcoin without even thinking about blockchains to prefer spot Bitcoin ETFs and anyone who does any research will tend to go with the cheapest way to invest and trade. All of this spells trouble for Bitcoin futures ETFs.

Rolling Over Futures Contracts

A futures contract gives a trader the right to buy or sell an asset like Bitcoin, crude oil, wheat, cattle, or gold for a set price as of a set future date. These contracts pretty accurately track the price of the underlying asset, in this case Bitcoin. But these contracts also expire. So, the ETFs that track Bitcoin futures need to constantly roll over (sell and buy again) in order to retain something near the current Bitcoin price. This is more expensive than just buying and holding Bitcoin. Thus, Bitcoin futures ETFs are going to be at a disadvantage when it comes to overhead with spot Bitcoin ETFs. This will be even before they have engaged in a price cutting war with the likes of Blackrock.

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